States to be allowed to opt any of borrowing options to meet compensation shortfall

Shishir Sinha | | Updated on: Dec 06, 2021

One option not to burden, second option requires additional resources from States

The Centre proposes easier norms for option related with borrowing limited to GST compensation shortfall due to ‘implementation issue’. However, States will have to bear interest if they opt for borrowing total shortfall which is sum of amount because of GST implementation issue and Covid pandemic.

States will be free to choose any of the two options. First option talks about borrowing ₹97,000 crore by States through special window, while second option prescribes borrowing ₹2.35 lakh crore through open market mechanism.

“After the scheme is finalized, the States can choose either Option 1 or Option 2 and accordingly their compensation, borrowing, repayment will be dealt as per their choice. The options are applicable only for the shortfall occurring in the current financial year,” a Finance Ministry statement said. The statement gave details about letter sent to States’/Union Territories’ Finance Secretaries said. It has been decided that Union Finance Secretary and Union Expenditure Secretary will address query from States on September 1.

During, GST Council meeting on August 27, the Centre proposes two options to meet the compensation shortfall. GST collection is estimated to be short by ₹3 lakh crore during this fiscal. Since, ₹65,000 crore is expected to be raised through compensation cess, there will be net shortfall of ₹2.35 lakh crore. This will have two portions – ₹97,000 crore on account of GST implementation issue (rate cut, relaxation in compliance etc) and ₹1.38 lakh crore because of Covid pandemic.

Option 1

Under this option, shortfall arising out of GST implementation will be borrowed by States through issue of debt under a Special Window coordinated by Finance Ministry. Here the rate of interest would be close to G-Sec yield. In case of increase in the interest cost, the Centre will provide subsidy to cover margin between G-secs and average of State Development Loan yields up to half a per cent.

This will be special borrowing and it will be over and above prescribed under borrowing ceilings prescribed under FRBM (Fiscal Responsibility and Budget Management). It will not be treated as debt of state. States will also be given permission to borrow up to 0.5 per cent of GSDP (Gross State Domestic Product) without meeting any pre conditions. This will enable borrowing of approximately ₹1 lakh crore in aggregate which is sufficient to meet shortfall on account of implementation issue.

In respect of Union Territories (including National Capital Territory), suitable arrangements to ensure flow of resources under the special window to them would be made by the Centre.

The interest on the borrowing under this option will be paid from the compensation cess as and when it arises until the end of the transition period (June 2022). After the transition period, principal and interest will also be paid from proceeds of the cess, by extending the cess beyond the transition period for such period as may be required.

“The State will not be required to service the debt or to repay it from any other source,” the statement said while making it clear that the Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the States. The first charge on the Compensation Cess each year would be the interest payable; the second charge would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the interest and principal are paid.

Option 2

States can borrow entire shortfall of ₹2.35 lakh crore through open market. For this amount, principal to be repaid through compensation cess, while States will be required to use own resources to pay the interest. Here total additional borrowing will be linked to conditions prescribed under Atmanirbhar Bharat which are universalisation of ‘One Nation One Ration card’, Ease of Doing Business, power distribution and Urban Local Body revenues. There will be no conditions for borrowing up to 4 per cent of GSDP.

Published on August 29, 2020
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